Political Risks to Outline EUR Trajectory?

Hello, traders, the week starts again with breaking news concerning the euro this time.

According to RBC Capital Markets Research Analyst Elsa Lignos the political risks that seem to be magnifying in the Eurozone will outline the trajectory of the European currency in the approaching term.

With the prospects of Le Pen expected to win the first round of elections for France’s presidency, the markets are overpricing Le Pen’s chances of victory, however “underestimating how damaging it would be to EUR if she were to win”, experts don’t hesitate to give voice to their concerns, as quoted by FX Street.

Relying on a synthetic framework, experts estimate EUR/USD to trade as low as 0.70, in the event of France holding a referendum on EUR membership. French public opinion supports the EU/EUR association, but the likelihood of voting to leave conditional on Le Pen’s winning the presidential run weighs a lot more in experts’ opinion.

The outcome of a referendum cannot be guaranteed by this kind of support, which is not strong enough. Furthermore, it may be unconstitutional to pop the question without the National Assembly’s support, as there is precedent for that dating as far back in history as De Gaulle. Political risk hovers above Europe beyond the French border, with the German election, less likely though to cause any dramatic outcomes in the evolution of the euro, but wearisome with the Italian political risk, which does not seem to end any soon.

Having said that, on a 6 to 12-month outlook, apart from the elections, major focus is on ECB. Inflation stays on the rise, reaching as high as 2% for the first time since 2013, on the Feb flash estimate, economists note. Core inflation by comparison, seems to stay below 1%y/y. With this in mind, the ECB should be confident enough “to extend its asset purchase programme into 2018, albe it at a slower pace”. Delving more into the phenomenon, Germany accounts for up to 40% on the Euro area’s core inflation, compared to Italy’s contribution which seems to remain lower considering the country’s size (~10%).

What is worrying though is that despite the confluence triggered by QE, the problem of fragmentation seems to persist across the Euro area. Lignos warns that the ECB’s greatest problems are yet to come as it gets closer to the inflation target. However, experts expect that situation to maintain the ECB in “easy policy mode for longer than would otherwise be expected”, while they anticipate the EUR/USD to go lower in the course of this year.

Stay tuned for more news and education!

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